FRM Part II · FRM Exam Part II · Repurchase Agreements and Financing
A hedge fund enters an overnight repo as the cash borrower, delivering USD 50 million of bonds with a 4% haircut to the cash lender. The repo rate is 3.60% on an actual/360 basis. What is the repayment amount the next day, to the nearest dollar?
The repayment is USD 48,004,800. The cash advanced is the collateral value less the 4% haircut, 48 million. Overnight interest at 3.60% on actual/360 is 4,800, which is added to the principal. Using the full 50 million as the base would be wrong.
- AUSD 48,000,000
- BUSD 48,004,800Correct
- CUSD 48,005,000
- DUSD 50,005,000
Explanation
Cash lent = 50,000,000 x (1 - 0.04) = 48,000,000. Interest = 48,000,000 x 0.036 x 1/360 = 4,800. Repayment = 48,004,800. Applying the rate to the full collateral value gives 5,000 of interest (the wrong base), and ignoring interest gives 48,000,000.
Did you get it right without looking?
One question tells you little. A timed set on Repurchase Agreements and Financing shows your real accuracy, how long you take and where you lose marks.
More Repurchase Agreements and Financing questions
- A treasurer wants to reduce the fire-sale and run risk associated with the bank's reliance on short-term repo. Which action best addresses t…
- A cash investor enters a 30-day repo, lending USD 50,000,000 against Treasury collateral at a repo rate of 4.80% per annum on an actual/360 …
- A regulator introduces minimum haircut floors for non-centrally cleared securities financing transactions to limit procyclical leverage. Whi…
- A money market fund lends cash through tri-party repos. A risk manager reviews its exposure to a dealer that has just been downgraded. Which…
- A bank has a USD 200 million overnight repo against collateral valued at 105% of the cash lent (a 5% initial margin, expressed as a ratio of…
- A dealer bank funds a portfolio of long-dated corporate bonds with overnight repos rolled each day. Which risk is most directly heightened b…